Getting menu pricing right is extremely important. If done right, it can drive sales and profit margins. If done wrong it can lead to profit loss and can be challenging to correct.

It can seem very difficult to determine what is the right way as there are so many opinions on how to price a menu. This is most likely due to the number of variables involved, such as menu style, location, and demographics that each property needs to consider. This article provides general pricing principles and considerations, but there is not one concrete answer that fits all operations.

Instead, we will explore how to use data and your competitive set to help determine your prices and a few other strategies to help lessen the shock when you need to increase prices.

% Pricing

Let’s begin with what was and is still used far too often. That method is % pricing where the owner/gm determines what food cost % they are happy with. Then the food cost $ is divided by the food cost % to come up with the selling price. Unfortunately, that means that many operations are not maximizing profit.

A food cost % is only useful when developing a business plan or budget and in the past 30% was the most common figure used. Otherwise, there is no positive reason to use it as an ongoing measurement or target.

So, why is it used?

It required the least amount of effort when measuring the chef’s financial performance. It either made the owner believe everything was running properly or that there were problems. However, the variance to a fixed target is not an accurate measurement unless the menu is accurately priced based on the %, which is seldom the case.

This pricing type strategy creates selling prices that are too high, too low and/or results that vary month to month.

Let’s look at some examples:

Too high of a selling price

Wagyu steak that costs $40 @ 30% the selling price would be $133. If you can sell it for that and turn over the inventory, then do it. But I would guess volume would likely be low, and waste would occur.

Let’s say most of your entrees have a profit margin of around $20. If you strategically price the Wagyu to $89 it is now an attractive price which will increase sales. The profit is $49 @ 44.9% food cost. That means the profit on one steak is equal to 2.5 customers at a $20 margin. Having too high of a selling price can also:

1. 1. Create waste due to low sales
   2. Cause chefs to reduce portions or downgrade the ingredients to lower the costs and selling price
   3. Reduce the price to a level that someone believes is fair, deviating from the pre-established 30%

Too low of a selling price

French onion soup cost is $1.75 @ a 30% food cost the price would be $5.83. That soup ranges from $8.00 – $10.00 or more. If you used % then you will be losing $2.17 of profit on every bowl sold. Low selling prices can also:

1. 1. Drive sales of items with low $ contribution
   2. Cause chefs to add to an already perfect menu item to increase the cost and selling price when they were already able to sell it at the higher price without increased costs
   3. Increase the selling price to a level that someone believes is fair again deviates from the 30%.

Varied month-to-month results

1. 1. High Food Cost – There is a great deal of time and effort wasted trying to figure out why the food cost is high. When in fact the high food cost % could be a good thing if all you sell is Wagyu steaks.
   2. Low Food Cost – Either everyone pats themselves on the back for a job well done and may be unsure of how the results were achieved or the manager wonders if someone cheated the process to achieve the result
   3. High Food Cost – The Chef will need to “figure it out” and that will be passed down the line. This creates a negative effect on the culture of the team.

Of all the points above which do you recognize?

Before moving on I want to address point #3 in all the sections above because they cause the most internal issues. Why?

When a chef is held to a specific food cost % target, they can not be expected to hit that when the decision is made to sell an item at a higher %. Yes, some items are sold at a lower %, but it will never equal 30%.

This measurement causes the most amount of conflict and issues because to hit the food cost target the chef has three choices:

1. 1. Cut corners by purchasing inferior products to save money. In a business where quality counts, this is very detrimental.
   2. Silently reducing portions that can lead to poor value for the customers.
   3. Pad the inventory to make the numbers come in line. Without the right controls in place, no one will know until that chef leaves.

Lastly, there is a large impact on the team. Unless you know exactly where the food cost issue occurred and who was responsible, there is a tendency to group everyone together and blame the entire team. That is not going to inspire a team or improve retention.

What is the right way to price a menu?

A form of margin pricing with a twist or two. It is difficult to give exact step by step due to the variables, but here are some guiding principles for both new operations and existing operations.

Established operations

Once you are operating you need to use a menu engineering process. It is a process that will deliver the best profit and makes menu changes and pricing very straightforward.

If you do not use menu engineering, then introducing it will be your first step.

Menu engineering can be intimidating, but with the proper setup and instruction, it is a very useful tool. In future CORE tips and strategies, we will dive into menu engineering.

New operations

If you are pricing a menu for the first time in a new operation, we will assume that your menu is written, and your recipes are costed. Now, it is time to pencil in more specific prices for each item.

This is an exercise in “how much would I pay for that” and to help come to that conclusion you need to understand your market and your competition.

1. 1. Identify who your competitors are and conduct an analysis of their operation and where you sit within the competitive set.
      • • Do you have a brand-new property with the latest design and décor?
        • Is your leadership team well connected and have a loyal following?

1. 2. Assess their menu and pricing for similar items. This is to find out the pricing range that you could charge.
      • • Create a list that includes the menu items and prices for all competitors on one page.

Now comes the unscientific part. You need to look at all the information and decide how you fit in the market and price accordingly for similar items. It is important to understand that being new does not mean you can charge the highest price as you may be competing with restaurants that have a long history.

Keep in mind:

• • High prices set high expectations. Charge appropriately and deliver every time.
  • Low prices may give the impression of lower quality.
  • Lowballing or undercutting the competition is a race to the bottom.
  • Consider offering specials or an introductory offer to attract people to try your restaurant.
  • If you miss the mark, you won’t (or should not) raise prices or adjust your recipes shortly after opening.
  • The best items are the ones with high profit and the best perception of value and quality.

The next step is to conduct a menu engineering exercise.

Selling price $ – Food Cost $ X Sales

But you have no sales.

If you are starting out, you had to make a business plan. That should have included projected revenue numbers. How did you come up with the revenue numbers?

Total number of customers (covers) X average check = revenue

The illustration below is oversimplified but shows how to utilize a portion of the menu engineering tool to set your prices and achieve your profit goals

Your business plan:

Projected

• • Sales 120 items
  • Average Check $4.50
  • Food Cost % 30% (Business plans are developed with % cost of sales)

 

This shows that the average check and food cost % are better than the projection. If those prices are right for your place in the market, then early indications are you will be successful if sales predictions are correct.

Since these are estimations, you want to leave some room in case the sales mix is different, and you sell more of the lower-margin items.

What if you do this exercise and you are not projected to hit your goals?

In this case, you need to rework the menu items.

Increase the value by adding new ingredients, increasing cost, and selling price:

Maintain value and selling price and decrease the cost:

Or a combination of both.

How to address the cost of goods increasing?

I am assuming you are running a very efficient operation, and when costs increase you either need to pass on that cost to the consumer or rework your menu.

Margin pricing is the most effective when prices go up. Here is why:

• • The menu item is $10.00 and the food cost 30%
  • Cost of goods (COGs) goes up $1.00

Margin Pricing – Raise your price by $1.00 to cover the cost increase

Food cost % Pricing – Raise your price by $3.33 to cover the same cost increase

You will most likely agree that the first option is the most palatable, so what happens to the food cost % pricing? Well, no one will raise the price that much and if your Chef is held to 30% how will they be able to hit that target?

Those are some basic menu pricing principles and once you come up with a structured approach to menu pricing the process will be seamless, and you will be able to quickly adjust to changes in the market.

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